nep-mic New Economics Papers
on Microeconomics
Issue of 2015‒04‒19
ten papers chosen by
Jing-Yuan Chiou
National Taipei University

  1. State Dependent Choice By Paola Manzini; Marco Mariotti
  2. Loss Aversion in Politics By Alberto Alesina; Francesco Passarelli
  3. Good Rankings Are Bad: Why Reliable Rankings Can Hurt Consumers By Laurent Bouton; Georg Kirchsteiger
  4. The citizen-candidate model with imperfect policy control By Aytimur, R. Emre; Boukouras, Aristotelis; Schwager, Robert
  5. Meaningful Talk By Jorge M. Streb; Gustavo Torrens
  6. Choosing on Influence By Tugce Cuhadaroglu
  7. Bayes Correlated Equilibrium and the Comparison of Information Structures in Games By Dirk Bergemann; Stephen Morris
  8. Dynamic Logit with Choice Aversion By Fudenberg, Drew; Strzalecki, Tomasz
  9. Axiomatic Foundations of Multiplier Preferences By Tomasz Strzalecki
  10. Asymmetric Auctions with More Than Two Bidders By Timothy P. Hubbard; Rene Kirkegaard

  1. By: Paola Manzini (University of St Andrews and IZA); Marco Mariotti (Queen Mary University of London)
    Abstract: We propose a theory of choices that are influenced by the psychological state of the agent. The central hypothesis is that the psychological state controls the urgency of the attributes sought by the decision maker in the available alternatives. While state dependent choice is less restricted than rational choice, our model does have empirical content, expressed by simple ‘revealed preference’ type of constraints on observable choice data. We demonstrate the applicability of simple versions of the framework to economic contexts. We show in particular that it can explain widely researched anomalies in the labour supply of taxi drivers.
    Keywords: Bounded rationality, procedural rationality, utility maximization, choice behavior.
    JEL: D01
    Date: 2015–04–11
  2. By: Alberto Alesina; Francesco Passarelli
    Abstract: We study loss aversion in majority voting. First, we show a status quo bias. Second, loss aversion implies a moderating effect. Third, in a dynamic setting, the effect of loss aversion diminishes with the length of the planning horizon of voters; however, in the presence of a projection bias, majorities are partially unable to understand how fast they will adapt. Fourth, in a stochastic environment, loss aversion yields a significant distaste for risk, but also a smaller attachment to the status quo. The application of these results to a model of redistribution leads to empirically plausible implications.
    JEL: H0
    Date: 2015–04
  3. By: Laurent Bouton; Georg Kirchsteiger
    Abstract: Rankings have become increasingly popular on various markets, e.g. the market for study programs. We analyze their welfare implications. Consumers have to choose between two goods of unknown quality with exogenous presence or absence of an unbiased informative ranking. The existence of the ranking might affect the welfare of all consumers negatively. With rigid prices, the ranking induced change in demand can be detrimental to all consumers in markets featuring rationing or consumption externalities. With perfectly flexible prices, the ranking might increase firms' market power, and hence lead to losses for all consumers even in the absence of rationing and consumption externalities.
    JEL: D8 L15
    Date: 2015–04
  4. By: Aytimur, R. Emre; Boukouras, Aristotelis; Schwager, Robert
    Abstract: We present a modified citizen-candidate model where the implemented policy arises from a compromise between the government and an unelected external power. We show that the two-candidate equilibria of this model differ significantly from the original: however small the cost of candidacy, the distance between the candidates´ policies, both ideal and implemented, remains strictly above a threshold. Moreover, there may be one-candidate equilibria in which the only candidate is not the one most preferred by the median voter. Both results point out that, even with negligible cost of entry, there are limits to strategic delegation.
    Keywords: elections,polarization,strategic delegation,bureaucracy,foreign influence
    JEL: D72 D78
    Date: 2015
  5. By: Jorge M. Streb; Gustavo Torrens
    Abstract: This paper develops a semiotic-inferential model of verbal communication for incomplete information games: a language is seen as a set of conventional signs that point to types, and the credibility of a message depends on the strategic context. Formally, there is an encoding-decoding step where the receiver can understand the sender's message if and only if a common language is used, and an inferential step where the receiver may either trust the message's literal meaning or disregard it when updating priors. The epistemic requirement that information be transmitted through the literal meaning of the message uttered leads to an equilibrium concept distinct from a Perfect Bayesian Equilibrium, ruling out informative equilibria where language is not used in its ordinary sense. The paper also proposes a refinement by which the sender selects among equilibria if all sender types are willing to play the same equilibrium.
    Keywords: Language, Verbal communication, Cheap talk, Language, Literal and equilibrium meaning, Signs, Comprehensibility, Relevance, Trust, Credibility, Equilibrium selection
    Date: 2015–02
  6. By: Tugce Cuhadaroglu (School of Economics and Finance, University of St Andrews)
    Abstract: Interaction, the act of mutual influence between two or more individuals, is an essential part of daily life and economic decisions. Yet, micro-foundations of interaction are unexplored. This paper presents a first attempt to this purpose. We study a decision procedure for interacting agents. According to our model, interaction occurs since individuals seek influence for those issues that they cannot solve on their own. Following a choice-theoretic approach, we provide simple properties that aid to detect interacting individuals. In this case, revealed preference analysis not only grants the underlying preferences but also the influence acquired. Our baseline model is based on two interacting individuals, though we extend the analysis to multi-individual environments.
    Keywords: Interaction; Social Influence; Boundedly Rational Decision Making; Two Stage Maximization; Incomplete Preferences
    JEL: D01 D03 D11
    Date: 2015–04–07
  7. By: Dirk Bergemann (Cowles Foundation, Yale University); Stephen Morris (Dept. of Economics, Princeton University)
    Abstract: A game of incomplete information can be decomposed into a basic game and an information structure. The basic game defines the set of actions, the set of payoff states the payoff functions and the common prior over the payoff states. The information structure refers to the signals that the players receive in the game. We characterize the set of outcomes that can arise in Bayes Nash equilibrium if players observe the given information structure but may also observe additional signals. The characterization corresponds to the set of (a version of) incomplete information correlated equilibria which we dub Bayes correlated equilibria. We identify a partial order on many player information structures (individual sufficiency) under which more information shrinks the set of Bayes correlated equilibria. This order captures the role of information in imposing (incentive) constraints on behavior.
    Keywords: Correlated equilibrium, Incomplete information, Bayes Nash equilibrium, Bayes correlated equilibrium, Robust predictions, Information structure, Sufficiency, Blackwell ordering
    JEL: C72 D82 D83
    Date: 2013–09
  8. By: Fudenberg, Drew; Strzalecki, Tomasz
    Abstract: We characterize a generalization of discounted logistic choice that incorporates a parameter to capture different views the agent might have about the costs and benefits of larger choice sets. The discounted logit model used in the empirical literature is the special case that displays a “preference for flexibility†in the sense that the agent always prefers to add additional items to a menu. Other cases display varying levels of “choice aversion,†where the agent prefers to remove items from a menu if their ex ante value is below a threshold. We show that higher choice aversion, as measured by dislike of bigger menus, also corresponds to an increased preference for putting off decisions as late as possible.
    Date: 2015
  9. By: Tomasz Strzalecki
    Abstract: This paper axiomatizes the robust control criterion of multiplier preferences introduced by Hansen and Sargent (2001). The axiomatization relates multiplier preferences to other classes of preferences studied in decision theory, in particular, the variational preferences recently introduced by Maccheroni, Marinacci, and Rustichini (2006a). This paper also establishes a link between the parameters of the multiplier criterion and the observable behavior of the agent. This link enables measurement of the parameters on the basis of observable choice data and provides a useful tool for applications.
  10. By: Timothy P. Hubbard (Department of Economics, Colby College); Rene Kirkegaard (Department of Economics and Finance, University of Guelph)
    Abstract: The theoretical literature on asymmetric first-price auctions has focused mainly on settings with either (1) exactly two bidders or (2) an arbitrary number of bidders with types in a common support. Even though closed form solutions are typically impossible, there is enough structure in the problem to guide both empirical work and numerical solutions or simulations. However, casual observation of real-world auctions suggests that the assumptions are restrictive. Indeed, the empirical literature has ventured beyond these models. We explain the relevant complications that arise if the above conditions do not hold, emphasizing that the structure of the problem changes significantly. Critically, the dimensionality of the problem appears to increase as bidders may now tender bids over different supports (bid bifurcation). The main conceptual contribution of this paper is to establish a method by which the dimensionality of the problem can once again be reduced. This insight is used to construct the first robust solution algorithm that allows for bid bifurcation. Accurate solution methods are essential to e.g. evaluate different counterfactual policies. We provide sufficient conditions, and in some cases necessary and sufficient conditions, for bid bifurcation to occur and demonstrate its relevance through a series of analytical and numerical examples. Implications for empirical work are emphasized.
    Date: 2015

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